For the maximum benefit of society as a whole, “corporate governance” must mean more than trying to reduce the frequency of corporate scandals. The immense cost of the Sarbanes-Oxley Act reflects a typical reaction--or overreaction--to the aftermath of a financial bubble. Although the monetary costs frequently get the most attention because they are immediately apparent, other factors need to be considered. These include what opportunity costs are imposed, whether the burden of increased controls and regulation induces mediocre performance, and broadly, whether society’s corporate governance portfolio should resemble a portfolio of Treasury bills or of equities. What is the trade-off between independence of directors and knowledge and how should these be balanced? These issues need to be considered in any discussion of optimal corporate governance.
How should a free society with a market economy view the purpose of corporate governance structures and practices? Is it only to reduce the incidence of financial fraud and scandal, which a certain number of egregious cases make notorious?
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